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Pennsylvania Professional Liability Joint Underwriting Association v. Tom

United States District Court, M.D. Pennsylvania

July 18, 2018

TOM, in his Official Capacity as Governor of the Commonwealth of Pennsylvania, et al., Defendants


          Christopher C. Conner, Chief Judge

         On May 17 2018 this court entered judgment in Pennsylvania Professional Liability Joint Underwriting Ass'n v Wolf (“JUA I”) No. 1:17-CV-2041 2018 WL 2263549 ___ F.Supp.3d ___ (MD Pa 2018) declaring portions of Act 44 of 2017 PL 725 No. 44 (“Act 44”) to be violative of the Takings Clause of the Fifth Amendment to the United States Constitution We held therein that by virtue of the breadth of its enabling legislation the Pennsylvania Professional Liability Joint Underwriting Association (“Joint Underwriting Association” or “Association”) is a private entity its assets are private property and the Commonwealth thus cannot expropriate the surplus funds held in the Association's coffers We permanently enjoined the Commonwealth from enforcing the legislation

         Act 41 of 2018 No. 41 2018 Pa Laws (June 22 2018) (“Act 41”) is the General Assembly's answer to JUA I Utilizing our earlier analysis as a blueprint Act 41 endeavors to avoid the constitutional infirmities of Act 44 Specifically it purports to, inter alia, fold the nonprofit Joint Underwriting Association into the Commonwealth's Insurance Department (“Department”), shift control of the Association from its current member-led board to a board comprised of political appointees, oust the Association's president in favor of a new executive director hired by the Commonwealth's Insurance Commissioner (“Commissioner”), and mandate transfer of all of the Association's documents, files, and assets to the Department within 30 days of the Act's effective date. The Association asks the court to enjoin enforcement of the operative provisions of Act 41.

         I. Background

         The Joint Underwriting Association commenced this lawsuit with the filing of a verified complaint on June 28, 2018, subsequently filing an amended complaint on July 3, 2018. Therein, the Association challenges the constitutionality of Act 41 under 42 U.S.C. § 1983. The Association asserts that Act 41 violates the Substantive Due Process Clause (Count I), the Takings Clause (Count II), and the Contract Clause (Count III), and seeks declaratory and injunctive relief pursuant to Section 1983 and the Declaratory Judgment Act, 28 U.S.C. § 2201 (Count IV). The Association identifies as defendants Tom Wolf, Governor of the Commonwealth; the General Assembly of the Commonwealth; the elected leadership of both chambers of the General Assembly; and Jessica K. Altman, Insurance Commissioner of Pennsylvania. All defendants are sued in their respective official capacities.[1]

         The Association moved for a temporary restraining order and preliminary injunction contemporaneously with the commencement of this case. The court denied the request for temporary restraining order and expedited proceedings on the request for a preliminary injunction. The court heard argument on the Association's motion on July 6, 2018. The parties agreed during oral argument that, for purposes of resolving the Association's motion, the factual record developed in JUA I is stipulated into the record sub judice. Accordingly, the findings of fact that follow are adopted from the court's summary judgment opinion in JUA I, with emphasis and reiteration of the facts most pertinent to the Association's instant claims.

         II. Findings of Fact

         The Joint Underwriting Association is a nonprofit association organized under the laws of the Commonwealth of Pennsylvania. See JUA I, 2018 WL 2263549, at *1. The General Assembly created the Association in 1975 in response to a “hard market” for medical malpractice insurance in the Commonwealth. Id. The Association was initially established and organized by the Pennsylvania Health Care Services Malpractice Act of 1975, P.L. 390, No. 111 (“Act 111”). The General Assembly repealed Act 111 on March 20, 2002, replacing it with the Medical Care Availability and Reduction of Error Act (“MCARE Act”), 40 Pa. Stat. & Cons. Stat. Ann. § 1303.101 et seq.

         A. The MCARE Act and the Joint Underwriting Association

         The MCARE Act is a sweeping piece of legislation, with an overarching goal of ensuring a “comprehensive and high-quality health care system” for the citizens of the Commonwealth. Id. § 1303.102(1). Among other things, the MCARE Act established the Medical Care Availability and Reduction of Error Fund (“the MCARE Fund”). See Id. §§ 1303.711-.716. The General Assembly designed the MCARE Fund as a “special fund” within the state treasury to be administered by the Department. Id. §§ 1303.712(a), -.713(a). The Fund provides a secondary layer of medical professional liability coverage for physicians, hospitals, and other health care providers in the Commonwealth. See Id. § 1303.711(g). It is funded primarily by annual assessments on health care providers as a condition of practicing in the Commonwealth. See Id. § 1303.712(d)(1).

         The MCARE Act continues the operation of the Joint Underwriting Association. Id. § 1303.731(a). Unlike the MCARE Fund, the General Assembly did not establish the Association as a “special fund” or a traditional agency within the Commonwealth's governmental structures. See id.; cf. Id. §§ 1303.712(a), -.713(a). Instead, the General Assembly “established” the Association as “a nonprofit joint underwriting association to be known as the Pennsylvania Professional Liability Joint Underwriting Association.” Id. § 1303.731(a). Like its predecessor, see Act 111, § 802, the MCARE Act mandates membership in the Association for insurers authorized to write medical professional liability insurance in the Commonwealth, 40 Pa. Stat. & Cons. Stat. Ann. § 1303.731(a).

         The MCARE Act requires the Association to offer medical professional liability insurance to health care providers and entities who “cannot conveniently obtain medical professional liability insurance through ordinary methods at rates not in excess of” rates applicable to those similarly situated. Id. § 1303.732(a). The Act sets forth broad parameters for achieving this objective, tasking the Association to ensure that its insurance is conveniently and expeditiously available, offered on reasonable and not unfairly discriminatory terms, and subject only to the payment of a premium for which payment plans must be made available. Id. § 1303.732(b)(1)-(5).

         The Association, like other insurers in the Commonwealth, is “supervised” by the Department through the Commissioner. Id. § 1303.731(a); see, e.g., Id. §§ 221.1-a to -.15-a, 1181-99. The MCARE Act prescribes four “duties” to the Association. Id. § 1303.731(b). It requires the Association to (1) submit a plan of operations to the Commissioner for approval, (2) submit rates and any rate modifications for Department approval, (3) offer insurance as described supra, and (4) file its schedule of occurrence rates with the Commissioner. See Id. § 1303.731(b)(1)-(4). Prior to enactment of Act 41, the MCARE Act insulated the Commonwealth from the Association's debts and liabilities. See Id. § 1303.731(c).

         The MCARE Act provides that all “powers and duties” of the Association “shall be vested in and exercised by a board of directors.” Id. § 1303.731(a). The board's composition, and all of the Association's operative principles, are set forth in a plan of operations developed by the Association with Department assistance and approval. See JUA I, 2018 WL 2263549, at *3. The existing plan establishes a 14-member board of directors, which consists of the current Association president; eight representatives of member companies chosen by member voting; one agent or broker elected by members; and four health care provider or general public representatives who may be nominated by anyone and are appointed by the Commissioner. Id. Under the plan, the Association may be dissolved (1) “by operation of law, ” or (2) at the request of its members, subject to Commissioner approval. Id. The plan further provides that, “[u]pon dissolution, all assets of the Association, from whatever source, shall be distributed in such manner as the Board may determine subject to the approval of the Commissioner.” Id.

         The Joint Underwriting Association writes insurance policies directly to its insured health care providers, and those policyholders pay premiums directly to the Association. Id. The Association is funded exclusively by policyholder premiums and any investment income generated therefrom. Id. It is not and has never been funded by the Commonwealth, and it holds all premiums and investment funds in private accounts in its own name. Id.

         The Association maintains contingency funds-its “reserves” and its “surplus”-which allow the Association to fulfill its insurance obligations in the event of greater-than-anticipated claims or losses. Id. An insurer's “reserves” are the “best estimate of funds . . . need[ed] to pay for claims that have been incurred but not yet paid.” Id. Its “surplus” represents “capital after all liabilities have been deducted from assets.” Id. The surplus operates as a “backstop” to ensure that unforeseen events do not impede an insurer's ability to meet obligations to its insureds. Id. As of December 31, 2016, the Joint Underwriting Association maintained a surplus of approximately $268, 124, 500. Id.

         B. Act 85 of 2016

         On July 13, 2016, Governor Wolf signed into law Act 85 of 2016, P.L. 664, No. 85 (“Act 85”). Act 85 is wide-ranging in scope, but its principal effect was to amend the General Appropriation Act of 2016 and balance the Commonwealth's budget. Act 85, § 1. Among other things, Act 85 provides for certain transfers to the Commonwealth's General Fund. See Id. § 1(7). Pertinent here, Section 18 of Act 85 amends the Commonwealth's Fiscal Code to require a $200, 000, 000 transfer to the General Fund from the Joint Underwriting Association, repayable “over a five-year period commencing July 1, 2018.” Id. § 18.

         The Association did not transfer funds to the Commonwealth pursuant to Act 85. On May 18, 2017, the Association commenced a lawsuit, also pending before the undersigned, challenging the constitutionality of Act 85. See Pa. Prof'l Liab. Joint Underwriting Ass'n v. Albright, No. 1:17-CV-886, Doc. 1 (M.D. Pa. May 18, 2017). The lawsuit names Randy Albright in his official capacity as the Commonwealth's Secretary of the Budget as the sole defendant. At the parties' request, that litigation has been held in abeyance pending resolution of appeals filed in JUA I.

         C. Act 44 of 2017

         Governor Wolf signed Act 44 into law on October 30, 2017, in another attempt to bring balance to the state budget. Act 44, § 1. Therein, the General Assembly expressly repeals Act 85. Id. § 13. Act 44, inter alia, amends the Fiscal Code to include certain “findings” concerning the Joint Underwriting Association's relationship to the Commonwealth and the nature of its unappropriated surplus. Id. § 1.3. Among other things, the General Assembly “finds” in Act 44 that the Joint Underwriting Association is an “instrumentality of the Commonwealth” and its monies “belong[] to the Commonwealth.” Id. Act 44 then mandates a monetary transfer from the Association to the Commonwealth-“$200, 000, 000 to the State Treasurer for deposit into the General ...

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